2a) COMPUTATION USING TRADITIONAL COSTING METHODComputing overhead absorption rate using direct labor hours as a basisNumber of hours required for each productBold = 30,000×2 = 60,000 labor hoursCold = 20,000×1 = 20,000 labor hoursTotal number of hours= 80,000 labor hoursAbsorption rate= 5,200,000/80,000 =$65/hrStatement of costBold$Cold$Direct materials cost (30,000)110.00 =3,300,000(20,000)160.00 =3,200,000Labor cost = 1, 500 , 000 = 500,000Overheads @$65/labor hour(60,000)65 = 3,900,000 = 1,300,000Total cost = 8 , 700,000 = 5,000,000Unit cost 8,7000,000/30,000 = $290/Unit5,000,000/20,000 = $250,0002b) Using Activity Based Costing Computing activity ratesCost driverTotal costs ($)Bold($)Cold ($)Energy (Machine hours)2,900,00030,000/150,000(2,900,000)=580,000120,000/150,000(2,900,000)=2,320,000Set up( No of inspection500,0003/10(500,000) =150,0007/10(500,000) =350 , 000Rental (Square meters)1,800,00035,000/140,000(1800,000) =450,000105,000/140,000(1800000)= 1,350,000Total OH allocation5,200,000 =1,180,000 =4,020,000Statement of costBold ($)Cold ($)Direct material cost3,300,0003,200,000Labor cost1,500,000 500,000Overheads1,180,0004, 020,000Total cost5,980,0007,720,0005,980,000/30,000 = $199.337,720,000/20,000 = $386.00c) Using ABC costingi) Bold selling price at 30% gross profit =$199.33×130%= $259.13ii) Cold selling price at 30% gross profit = $386×130% =$501.802d) Non value added activities are activities which increase the time spent on a product or a service despite not increasing the product’s worth to the customer.
Such activities ought to be reduced or eliminated since their elimination will not reduce the responsiveness, quantity or quality of the customers’ required output.
In other words, the activities add no value to the product or service. Examples include storage apart from some storage activities such as storing wine which adds value to the wine stored, the transport of work in process within the premises, most inspection activities and employee empowerment activities. ii) A factory with many product lines will benefit from an ABC system due to its ability to estimate individual products cost precisely. This is because overhead costs are transferred to individual units of products.
As such, the factory can also easily identify non profitable products as well as the highly profitable products. iii) When implementing ABC/ABM, management must consider human behavior as well. Just like when implementing other new management tools, there need to be an effective change management process in place before implementing the ABC system in a bid to ensure that this is supported even by the human resources. The acceptance of the system by the employees could be achieved by demonstrating how previous systems have been giving a distorted result which is misleading.
As such, the management needs to encourage behavior change by advocating for such a system that will increase relevance of information that’s required for managerial decision making and improved performance management. Such a change management system should address employees issues that could arise in its implementation 3. Joint cost allocationa) Physical method Allocation of joint cost Subber = 450,000/ (450,000+350,000) ×7,500,000 =4,218,750Tubber = 350,000/ (450,000+350,000) × 7,500,000 =3,281,250Total costs= joint cost allocation + additional processing costSubber = $4,218,750 +2,500,000 = $6,718,750 cost per unit = $6,718,750/450,000=$14.93Tubber = $3,281,250 +1,100,000 =$4,381,250 cost per unit =$4,381,250/350,000 =$ 12.52Cost of inventory using the physical method Subber= $14.93× 140,000 units =$2,090,278Tubber =$12.52× 120,000 units = $1,502,143b) Net realizable value Allocation of joint costsEstimated net realizable valueSubber =$ (450,000 × 40) - 2,500,000 = 15,500,000Tubber =$ (350,000× 30) - 1,100,000 = $9,400,000Joint cost allocation Subber =15,500,000/ (15,500,000+9,400,000) × 7,500,000 =$ 4,668,675Tubber = 9,400,000/ (15,500,000+9,400,000) ×7,500,000 =$ 2,831,325 Total unit cost Subber = $4,668,675 +2,500,000 =7,168,675/450,000 =$15.93 Tubber =$2,831,325 +1,100,000 = 3,931,325/350,000= $11.25 Inventory value Subber =$15.93× 140,000 = $ 2,230,254Tubber = $11.23 ×120,000 =1,347,883C) Constant gross margin methodConstant gross margin percentage: Total expected sales = (310,000×40 +230,000×30) = $28,500,000Total cost of expected sales = $2500000+1100000+7500000= 11,100,000Total gross margin = (28,500,000-11,100,000) = 17,400,000Total gross margin percentage = 17,400,000/28,500,000= 61.05%Cost of goods sold Subber = (1-61.05) × 18,000,000= $7,010,526.30Tubber = (1-61.05) × 10,500,000 =$4,089,473.70Unit cost of expected sales Subber = $7,010,526.30/450,000 =$15.58Tubber = $ 4,089,473.70/350,000 =11.68Inventory cost Subber =$15.58× 140,000 =$2,181,053.00Tubber = 11.68×120,000 =$1,402,105.003d) using net realizable valueSubber unit Cost of production = $15.93Selling price per unit = $40Gross profit margin =$40-15.93= $24.07Gross profit margin as a percentage = 24.07/40 = 60.18%Zubber unit cost of production = $15.93 + $12 =$27.93Selling price per unit = $47Gross profit margin = $47-27.93 = $19.07Gross profit margin as a percentage = $19.07/47= 40.57%